In the lending world, a major part of the credit adjudication process is assessing the value of your security. Some lenders use automated valuations, some lenders rely on CMHC’s concurrence with the value stated in the application, and still others will request that an appraisal be performed – whether it be a full appraisal or a drive-by. Some lenders will use all of the above and here is how they are not only different from one another but in many ways complement one another.
AVM + agreement from insurer + appraisal = the most probability that you know what the property you are loaning on is worth. Let’s drill down and take a look at each resource and the nuances.
An automated valuation model, or AVM, is a program which produces a property value derived from mathematical calculations. AVMs are most useful at the application stage because, not only can you validate the property value indicated in the application but you may also learn that the property was not worth the value stated or that it is worth more and an upsell opportunity is present. Because AVMs can generally be produced online they are sometimes pulled multiple times over the course of a mortgage transaction.
If the AVM wasn’t requested at the application stage – it generally will be shortly thereafter as the deal proceeds through the closing process.
If you have requested an AVM and it agrees with the stated value on the application then it is highly likely that the insurer will not dispute the value of the property.
Appraisals involve a certified professional going out to the property, so appraisals can reveal applicants with: properties in very poor condition, undisclosed construction/renovation, rental properties that are listed on the application as principal residences and much, much more. On the flip side, an appraisal can be great for a property that is in excellent condition.
Now, the reason that appraisals complement AVMs is because, while there is some overlap in that both derive a property value, they are very different. An AVM is analytical and based on formulas – it is not swayed by personal opinion, nor does it take into consideration the interior and exterior condition of a property.
So as you can see, while it can seem like the 2 outlined in this blog do the same thing, they actually don’t and leveraging both will see you close more deals and identify more opportunities.
For more about the difference between an AVM and an appraisal please contact Teranet today by calling 1.855.787.8439.